Question 1

Which of the following statements relating to the cash basis of accounting is incorrect?

Accepted Answer

The cash basis of accounting is not considered to be a suitable method of accounting for governments. Governments require a more comprehensive method of accounting, such as the accrual basis, to provide full and accurate financial information.

Question 2

Profit for a financial period is measured as:

Accepted Answer

Profit is typically calculated as income minus expenses. This reflects the amount of money that a business has earned beyond what it has spent in a given financial period. Options B and C both relate to balance sheet measurements, which are important but do not specifically relate to profit. Option D refers to debits and credits, which are accounting terms and do not reflect profit either.

Question 3

On the first day of the financial year Merv's Boats purchased a truck for $16 000. The truck is to be depreciated by 25% each year and has a zero residual value. At the end of the first year the adjusting entry to record depreciation on the truck is:

Accepted Answer

The adjusting entry to record depreciation on the truck is to debit Depreciation - Truck and credit Accumulated depreciation - Truck. Since the truck is to be depreciated by 25% each year and it was purchased for $16,000, the depreciation for the first year would be $4,000 (25% of $16,000). Therefore, the correct entry is:

DR Depreciation - Truck $4,000; CR Accumulated depreciation - Truck $4,000

Question 4

Adjustments where income is earned or expenses incurred before the cash is received or paid are called:

Accepted Answer

These types of adjustments are called accruals. Accruals involve recording revenue or expenses in the period they are earned/incurred, even if payment hasn't been received or made yet. This is needed to ensure that financial statements accurately reflect the company's financial position for the period.

Question 5

The last step in the manual accounting cycle before the preparation of financial statements is:

Accepted Answer

The last step in the manual accounting cycle is to prepare an adjusted trial balance, which includes all adjusting entries made to the general journal. This adjusted trial balance is then used to prepare the financial statements. Therefore, option C is the correct choice. Options A and B involve determining and posting adjusting entries, which are steps that occur before the preparation of the adjusted trial balance. Option D involves recording journal entries and posting to the ledger, which occurs earlier in the accounting cycle.

Question 6

Which of the following statements relating to balance day adjustments is correct?

Accepted Answer

Balance day adjustments can have at least one effect on the income statement (revenue or expense recognition) and one effect on the balance sheet (asset or liability recognition or valuation). They do not necessarily always affect the cash/bank account, so option C is incorrect. Option A is too broad as balance day adjustments can affect both the income statement and the balance sheet. Option B is incorrect as balance day adjustments do not only affect the income statement.

Question 7

Hannah Ltd uses gardening supplies on a daily basis. Under the accrual method of accounting these supplies would be an expense of the period in which they are:

Accepted Answer

According to the accrual method of accounting, expenses are recognized when they are incurred, or when they are used, regardless of when they are ordered, received, or paid for. Therefore, in the case of gardening supplies, they would be recognized as an expense of the period in which they are used by the company.

Question 8

Which of the following statements concerning accrual accounting is correct?

Accepted Answer

Accrual accounting recognises expenses in the period in which the consumption of costs can be measured in a faithful, verifiable manner, not necessarily when the cash is paid. The statement in option B is a feature of cash accounting, not accrual accounting. Option C is incorrect as income should be recognised when earned, not when the cheque is cashed. Option D is incorrect as the accrual approach provides a better measure of economic performance as it matches revenue and expenses to the periods to which they relate.

Question 9

Preparing adjusting entries at the end of the financial year is necessary:

Accepted Answer

The main purpose of preparing adjusting entries at the end of the financial year is to calculate the profit or loss as accurately as possible. These entries ensure that all revenue and expenses are properly recognized in the correct accounting period, allowing for an accurate calculation of net income or loss. While adjusting entries may also correct errors and prepare the ledger for the next accounting period, the primary reason for their preparation is to calculate the company's financial performance during the period just ended. Therefore, option D is the best choice.

Question 10

The office supplies stock account is a/an:

Accepted Answer

The office supplies stock account represents an inventory of products available for use in the business, which is considered an asset.

Question 11

The correct order of steps in the manual recording process is:
I Post transactions to the ledger
Ii Record transactions in the journal
Iii Prepare financial statements
Iv Record adjusting entries

Accepted Answer

The correct order is to first record transactions in the journal, then post those transactions to the ledger, followed by recording any necessary adjusting entries, and finally, prepare the financial statements.

Question 12

Sampson Ltd.'s employees perform work to the value of $6500. They are paid $3500 immediately with the balance to be settled in the next accounting period. Under the cash approach to profit measurement, the amount of wages expense that will be recorded in the current period is:

Accepted Answer

Under the cash approach to profit measurement, expenses are recognized when they are paid in cash. Since $3500 out of the total $6500 wages have been paid in the current period, only the amount paid i.e. $3500 will be recognized as expenses in the current period. Therefore, the correct choice is (B) $3500.

Question 13

Which of these is not a name for the original cost of an asset less its accumulated depreciation (if any)?

Accepted Answer

Depreciable amount refers to the cost of an asset that is subject to depreciation, not the original cost less accumulated depreciation. The other choices all refer to the original cost less accumulated depreciation. Carrying amount and book value are interchangeable terms, while written down value is a less common term used in some accounting systems.

Question 14

Accountants prefer to calculate profitability using the________ basis rather than the____________ basis:

Accepted Answer

Accrual basis takes into account all revenues earned and expenses incurred during a period, regardless of when the money changes hands. Cash basis only considers the actual inflow and outflow of cash during a period. Accrual basis provides a more accurate picture of a company's financial performance over time, which is why accountants prefer to calculate profitability using this basis.

Question 15

The cash approach to profit measurement will not give a reliable profit figure for an entity that conducts a significant portion of its business:

Accepted Answer

The cash approach only records revenue when cash is received and expenses when cash is paid out. It does not take into account revenue from credit sales which are recorded when the sale is made, not when the cash is received. Therefore, if a significant portion of a business's sales are on credit, the cash approach will not give an accurate reflection of the actual profit.

Question 16

Adjustments which are necessary because cash for expenses is paid in advance or cash from income is received before the provision of goods or services are called:

Accepted Answer

Deferrals or prepayments are adjustments made to account for expenses that have been paid in advance or for income that has been received before goods or services have been provided. These adjustments ensure that expenses and revenues are recognized in the appropriate accounting period. Accruals, on the other hand, are adjustments made for expenses that have been incurred but not yet paid or for revenues that have been earned but not yet received. Temporary adjustments and recorded adjustments are not common accounting terms.

Question 17

The accrual approach to profit measurement is underpinned by which two main accounting assumptions?

Accepted Answer

The accrual approach relies on the going concern assumption, which assumes that the business will continue operating in the foreseeable future, and the accounting period assumption, which divides the business's life into distinct time periods for reporting purposes.

Question 18

What type of account is Unearned Income?

Accepted Answer

Unearned income is a liability account that represents revenue received in advance for goods or services that have not been provided yet. It is considered a liability because the business owes the customer the goods or services in the future.

Question 19

On 1 October 2018 Tanya's Pools paid $2400 for a 12 month insurance premium. The $2400 was initially recorded in the insurance expense account. The adjusting entry required to accurately represent the expired insurance at 31 December 2018, the close of the annual accounting period, is:

Accepted Answer

The correct adjusting entry is to debit Prepaid Insurance and credit Insurance Expense for $1800. This is because, by 31 December 2018, 3 months of the insurance have expired ($2400 / 12 months * 3 months = $600), leaving 9 months unexpired. The prepaid insurance account should reflect the value of the unexpired insurance, which is $1800 ($2400 - $600). This adjustment correctly represents the expense for the period and the remaining prepaid amount.

Question 20

Accrued salaries is a/an:

Accepted Answer

Accrued salaries are salaries that have been earned by employees but have not yet been paid by the company. As a result, they are a liability that the company owes to its employees and are recorded as a liability account on the balance sheet.

Quiz 4: Adjusting the Accounts and Preparing Financial Statements